Believe it or not, it’s the Internal Revenue Service that determines those limits, and it does so on an annual basis. The IRS actually reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, IRAs, and other retirement savings vehicles each year, usually in November.
If you missed it, the IRS announced last year the maximum amount workers can contribute to a 401(k) for 2020 would be increased to $19,500 – a $500 bump from 2019. In addition, elective catch-up contributions that workers 50 and older can make is jumping to $6,500 from the previous limit of $6,000, bringing the elective deferral limit for those folks to $26,000 in 2020.
All of this, remember, is for elective deferrals. It does not include any matching contributions your employer makes on your behalf.
Here is how to take full advantage your 401(k) plan:
- Max out your contributions when you’re able. For each year, aim to hit the $19,500 limit.
- Once you turn 50, try to add another $6,500 to that limit annually while you continue to work.
- If your employer offers to match your contributions up to a certain amount, be sure to invest at least that much in your 401(k) each month. It’s free money.